European Supplement

Positive prospects for 2007

European supplement

The UK housing market was stronger than we expected last year – and prospects for 2007 and beyond are positive. The price of property relative to income is a key issue in the UK, but it has failed to constrain the market as much as we expected. Property sales were up 16 per cent last year, and annual house price growth strengthened from around 4 per cent at the start of the year to 10 per cent at the end of 2006.

The housing market varied from one region to another. Strong growth in London was driven by special factors, including City bonuses, purchases by foreign nationals and strong inward migration within the UK. The housing market in Northern Ireland was also particularly strong, reflecting greater stability and improving economic performance, and the buoyant Irish economy.

In all areas, the property market was driven by a stronger-than-expected UK economy and the underlying strength of demand for housing. The problems caused by a shortage of housing have been clear for a long time, but the government and planning authorities have so far failed to get to grips with them. Every year, the number of households continues to grow more quickly than the supply of available homes. That will continue to underpin the housing market, and house prices, for the foreseeable future.

The number of loans for house purchase grew by 12 per cent in 2006. Mortgage lending was strong, and we recorded a succession of record monthly totals during the year. Gross lending totalled £346 billion in 2006, 20 per cent higher than the year before. Remortgaging contributed to the growth, rising by 7 per cent last year, although the number of homeowners pursuing this option fell by around 2 per cent. Lenders are getting better at retaining customers – and the number of borrowers remortgaging to a new lender has now been falling since 2003.

One particularly strong sector in 2006 was buy-to-let – investment in the private rented sector funded by mortgages. The overall number of loans grew by 21 per cent to 850,000, while their value increased by 29 per cent to nearly £95 billion. Buy-to-let has been the biggest single factor in the revival of private renting, now enjoying a resurgence in the UK after decades of decline. Buy-to-let has improved standards of accommodation for tenants and competition has provided them with greater choice – not just in city centres, but right across the country.

For the foreseeable future, we expect the broader housing market to continue to show resilience – although growth over the next couple of years is unlikely to be as strong as in 2006. We are predicting sales this year at the same level as 2006, and annual house price growth to moderate to 7 per cent by the year-end. Gross advances are forecast to rise by around 4 per cent to £360 billion.

The number of lenders who are members of the CML increased by 10 per cent in 2006 – and market competition will continue to benefit borrowers. Margins are being forced down, offsetting some of the effects of higher interest rates. Lenders are making greater use of affordability measures focusing on how much monthly income goes on housing costs, rather than conventional income multiples. Changes of this sort are helping to continue to make homeownership accessible, despite rising property prices and interest rates.

But affordability is stretched, and it is not an easy time for anyone to enter the market. For a number of years now, the proportion of home purchases made by first time-buyers has been falling. By the end of 2006, it was hovering at around 35 per cent, compared to the long-term average of between 45 and 55 per cent.

The outlook for first-time buyers is unlikely to improve over the next couple of years. In 2006, we worked with lenders and the government to expand its shared equity scheme. It is a modest measure, and the scheme is only open to a limited range of buyers – but we hope to be able to build on it in the future.

The reality is that many more first-time buyers are now likely to be getting help from their parents – the so-called Bank of Mum and Dad, which remains unregulated by the Financial Services Authority. It is ironic that the growth in house prices, which has caused so much difficulty for young people, has enabled their parents to build up a store of wealth in their own homes. Now they want to find ways to avoid paying inheritance tax, and many are drawing on housing wealth to provide their children with a deposit for their first home.

Whether access to home-ownership should be determined in this way is another question. In a difficult market for first-time buyers, the ‘haves’ are in a privileged position, but there is a real risk that the ‘have nots’ will become even more excluded. Housing, taxation and help for first-time buyers are certain to be key issues in the next general election in the UK – and will be uppermost in the mind of the new Prime Minister when Tony Blair steps down later this year.